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In 2002, United Technologies Corporation was coming off its most profitable year ever. The various units of UTC, which owns businesses ranging from helicopter manufacturer Sikorsky to Otis (“the world’s leading manufacturer, installer, and maintainer of elevators”), had a net income of $1.9 billion off $27.8 billion in sales in 2001. Pratt & Whitney, the aircraft engine unit of UTC, was poised to bring in billions more from defense contracts, supplying the engines for Lockheed-Martin’s F-22 Raptor, the F-35 Joint Strike Fighter program, and the Boeing C-17 Globemaster III cargo plane.

But there were still opportunities to make even more money. One of the most promising came from Pratt & Whitney’s Canadian subsidiary, which had a plan to open up an entirely new market—China. Large risks were involved, however: the program was shrouded in secrecy, for one. It also involved working with partners who had a reputation for ripping off technology.

And it just happened to be illegal.

Pratt & Whitney Canada wanted to help China's state-owned Aviation Industry Corporation (AVIC) develop the Z-10—China’s first modern attack helicopter, comparable to the US Army’s AH-64 Apache. While operating under the cover story that this was a “dual use” helicopter—built both for civilian and military purposes—at least some people in Pratt & Whitney Canada’s marketing and export team knew exactly what they were getting into.

In an August 2000 e-mail, a Pratt & Whitney Canada marketing employee described the negotiations with AVIC and the China National Aero-Technology Import and Export Corporation (CATIC) this way, according to documents released last week by the US Department of Justice: "Discussions on the P&WC engine for Chinese Z-10 attack helicopter are progressing smoothly. From the attendance at the meetings, it is clear that this is a serious effort and they have a tight timetable.”

“I believe it is important that P&WC management take a clear position on this project," he added. "Aside from legal considerations on export control issues, how will P&WC/UTC respond if US government put some pressure on UTC? P&WC will lose all credibility in China, if P&WC/UTC, as a corporation, backs out of the program at a later date when put under pressure even if a legal basis for export restriction may not exist."

AVIC told P&WC’s representatives that it had been developing its own engine but had run into delays; it was seeking an engine supplier to move on quickly with the development of the Z-10. The long-term goal, the Chinese said, was to equip a civilian version of the helicopter with a “western” engine—creating a huge sales opportunity for P&WC—while eventually putting the AVIC-developed engine into the military version. If P&WC wanted in on the civilian helicopter, it was told, it had to help build the military one. With a potential payoff in the billions and a long-term chunk of China’s growing helicopter market, Pratt & Whitney Canada executives saw this as a calculated risk.

But in the end, the company got the shaft. There never was a civilian variant of the helicopter—the Chinese opted for a larger design and re-opened competition, breaking an exclusive deal with the company. During the project, P&WC also transferred sensitive technology—electronic engine control software—that had a potential impact far beyond the development of China’s first “world class” assault helicopter.

As a result of Pratt & Whitney Canada’s involvement with the Z-10, China gained technology that potentially accelerated the development of the country’s own advanced jet propulsion systems. The software Pratt & Whitney Canada put into the hands of the Chinese Aviation Industry Corporation “can be modified for use in other jet engines," said Mark Bobbi, senior analyst for military aircraft at IHS Janes, in an interview with Ars. “Theoretically, they could use that software and develop new fuel control for the J-10 stealth fighter to improve engine efficiency, for instance.”

This sort of gamble is taken all too often by executives lured by the promise of huge profits. Every year, major multinational technology and aerospace companies—by oversight, by subterfuge of a third party, or by deliberate action—sell technology restricted by US law to countries that are banned from receiving it. While some companies try hard to comply with US International Traffic in Arms Regulations (ITAR), others seem to accept the occasional fines and slaps on the wrist as part of the cost of doing business—and a very profitable business, at that.

Out of (export) control

Much of the US military’s might depends on technology—technology developed at the cost of billions and billions of dollars in taxpayer money. Guarding that technology from potential adversaries can be difficult, especially when the technology gets shot out of the sky or crash lands and ends up in hostile hands. Take, for instance, the stealth unmanned aircraft captured by Iran last December, or the special operations helicopter recovered by Pakistan after the mission to take out Osama Bin Laden last May.

China has made the most out of these sorts of opportunities. In the wake of the Tiananmen Square protests and crackdowns in 1989, Congress explicitly banned the export of any technology with military applications to China. So China's military and its state-owned industries have used whatever means necessary to obtain what they want. The prototype J-20 Chinese stealth fighter unveiled last year, for example, appears to be based on technology recovered from a US F-117 stealth fighter shot down over Serbia in 1999. Chinese intelligence got to examine the stealth helicopter that SEALs flew in to take out Bin Laden. And China has been accused of widespread industrial espionage and cyber attacks on US defense contractors in a quest to unearth technology secrets.

But it doesn't always need such drastic measures—sometimes, US companies will just sell China off-the-shelf technology. (As Vladimir Lenin once put it, “The capitalists will sell us the rope with which we will hang them.” Except the Chinese are now capitalists, too.) The Chinese technology industry has learned to get major tech companies to sell it components which can then be reverse-engineered, copied, or just plain stolen; ask Cisco or American Superconductor.

Governments have a long history of trying to prevent technology companies from trading with countries that have been labeled off-limits. There's also an equally long history of companies working around it.

ITT, for example, owned 25 percent of Focke-Wulfe, the German aircraft manufacturer that supplied fighter aircraft to the World War II-era Luftwaffe; ITT also owned another company that built radios for the Wermacht. In 1983 and 1984, Toshiba sold $17 million worth of computer-driven milling machines to the Soviet Union, allowing the Soviet Navy to create noiseless propellers for its submarine fleet and counter the US’s SOSUS undersea sonar tracking network. Experts put the damages to US military capability at $30 billion.

While ITT actually received compensation for Focke-Wulfe factories that were damaged by Allied bombers, Cold War politics weren't as kind to Toshiba. Two executives were arrested and the company was banned from doing business with Soviet bloc countries for one year—the harshest sanction ever imposed by Japan for a trade violation (at the time, trade with Soviet countries accounted for 12 percent of Toshiba’s high-tech machining business). And the US military banned Toshiba from competing for government business for years.

And those profits are even bigger when dealing with China, thanks to its economic strength.

In the case of the Z-10, Pratt & Whitney Canada's export managers were drawn down the rabbit hole by the promise of a big no-compete deal for legitimate business in exchange for a seemingly small bending of the rules.

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Sean Gallagher
Sean is Ars Technica's IT and National Security Editor. A former Navy officer, systems administrator, and network systems integrator with 20 years of IT journalism experience, he lives and works in Baltimore, Maryland. Emailsean.gallagher@arstechnica.com//Twitter@thepacketrat